John Wilson, director of Socially Responsible Investing at Christian Brothers Investment Services Inc. gives us ten reasons why not to invest in microfinance


#10 Social Justice? Who cares?

At the end of the day, financial returns matter as much as social returns. For broad access to social investment markets, financial performance has to be competitive with investment opportunities of similar risk and return profiles. MFIs need to understand the investor rationale.

The concept of a double bottom line is that there is a mix of profitability and a significant social component. At the end of the day, investing in microfinance is definitely better than giving out grants which have no financial returns at all. If investors did not want the social component in the investment, they might as well invest in the wall street rather than microfinance. Investments are coming into the microfinance market in India and investors do look for the quantifiable social improvements before they make the investment.

#9 We can't trade the securities.

MFI shares are not typically tradable in a liquid market.

The trend is changing. Do check the BRAC deal and also incorporation of microfinance specific investment banks like Grameen Capital India that are pioneering this effort. Also check the recent comportamos deal.

#8 We can't price them.
Nontradable securities do not have efficient pricing mechanisms and, therefore there is no way to report the net asset value of investments regularly (daily or even monthly) as required by institutional investors.

For the initial few microfinance securities it is definitely hard to price them. However, pricing will be possible once

#7 We can't legally own them.
The Investment Act of 1940 allows fiduciaries to invest in a range of investments that could include MFIs, given certain restrictions for different asset classes. Money market funds, for example, would be exempt. Bond and equity funds would be acceptable, though current practice
and other restrictions (e.g. daily valuations) limit the potential.

Not sure !!!!

#6 Theyre not entirely useful.

MFI investments do not fit traditional investment strategies. For example, MFIs will never represent more than a very small fraction of an asset manager?s portfolio (which typically range from hundreds of millions, to billions, of dollars), and thus do not help diversify portfolios.Managers need another reason to include MFIs in a portfolio (e.g., this asset classis uncorrelated with other markets). Also, since MFI investments do not match floating benchmarks, an asset strategy cannot be implemented in any case since their prices do not
fluctuate. It should be noted that the speaker also applied his comments to US-based ommunity Development Financial Institutions (CDFIs).

#5 They?re too risky.
The level of financial disclosure is not as formalized as in other types of
investments, and therefore it is much harder for an asset manager to
understand MFI investment risk. This leads to an exaggerated perception of
MFI default risk. This combines with already high perceptions of country
risk, currency risk, and various other risks plaguing developing country
investments.

Relatively less riskier than credit card payments. Repayment rates upto 99%

#4 Their ?guarantees? don?t guarantee enough.

There are different types of risk and the guarantees typically provided do
not sufficiently hedge against all the risk seen as inherent in MFI
investments.

We need folks like Grameen foundation to step in and they are ready to do it to some extent. Therefore the point on guarantee is untrue

#3 We are fiduciaries.
Fiduciaries have legal responsibility to maximize performance. Socially responsible fiduciaries are possible and legal because their investment decisions are based on financial returns that are not sacrificed for social return.

Not sure !!!

#2 We don?t have the expertise.
Investors don?t have in-house expertise. They either need to build in-house expertise or outsource this function. At a minimum, asset managers need information to gauge MFI investment performance relative to appropriate benchmarks. Any information supplier must have good credentials and proven analytical techniques. Professionals from the CDFI/MFI sector could serve this function well since they can answer the kinds of questions typically posed by fund managers.

Again, if there is a good business plan and several deals like comportamos, this can change.

#1 The great divide.
In most investment companies, there is an organizational and cultural separation between those who manage assets and those who apply social investment criteria. This is to avoid conflicts of interest between those screening investments and those managing assets. Investment managers are not compensated on social return, and hence have little incentive to incorporate
these strategies without an investment perspective. Most asset managers have an investment background and, coming from that perspective, believe in efficient markets. They assume that if MFI investments are not already desired by asset managers they are not valuable assets. The MFI professionals do not typically speak the language of asset managers, leading to confusion and difficulty working together and, ultimately, difficulty establishing the value of MFI investments. The key is to learn to speak the language of asset management and to devise products that fit an investment strategy as well as a social mission.


Not sure

The bottom line is market creation is necessary and the question is who is going to bell the cat?